NJ Balanced Advantage Fund NFO review: Should you invest in it?

What works

NJ BAF’s rule-based approach will follow a combination of four factors that have been back-tested over the past 19 years. This exercise is done by the fund house to see how the scheme would have performed with its asset allocation signals and stock selection rules.

“Our aim with this BAF is to reduce equity-linked volatility, while still matching Nifty or close to Nifty returns,” says Rajiv Shastri, chief executive officer of NJ MF.

Other BAFs out there also use certain models that signal if it is the right time to switch the exposures between equity and debt.

NJ’s BAF will use a complex multi-factor strategy to gauge whether markets appear expensive or cheap. Its strategy will not only consider Nifty’s price-to-earnings ratio, but also the worst-case P/E scenario based on historical data. There would also be a comparison with risk-free return (G-Sec yields). The expected earnings growth will be factored in, too.

Depending on the signal shown by these rules, the fund will decide its allocation to equity and debt. The BAF will rebalance allocations every quarter.

Stock selection will also be rule-based. As liquidity is a criterion that NJ BAF will adhere to, equity investments will mostly consist of large and mid-cap stocks. The other rules for equity investments will be quality, value, momentum and low volatility.

Ravi Kumar TV, founder of Gaining Ground Investment Services, says stock selection is what matters the most in a BAF for it to perform better than others.

He adds that BAF would be an important category in future, if it is able to generate reasonable returns, while protecting against downside. “Investors don’t like volatility, which is what can make BAFs a much larger category, if these products meet investor expectations of reduced volatility,” he adds.

The debt portion of NJ BAF will be invested in highly-liquid and safe debt securities such as Government Treasury Bills and TREPs.

At current market levels, NJ BAF’s rules suggest 40 percent allocation to equity. For taxation purpose, the scheme will make additional allocation to equity arbitrage strategies (using equity derivatives) so that the fund gets equity status for taxation and investors are taxed at the lower rates.

What doesn’t

Financial planners say that it is important to see how a BAF would deliver in a real market scenario. “Every BAF uses the fund house’s internal models that are unique to that fund house. Back-testing is fine, but real market performance may not necessarily be the same. So, it is better to first wait and watch how the fund does after its launch,” says Amol Joshi, founder of Plan Rupee Investment Services.

Also, retail investors may not be able to understand the internal workings of a BAF easily. “BAF is a complex category. Its complexity stems from dynamically allocating between equity and debt, as well as investing in equity derivatives for the favourable equity fund status for taxation,” says Vidya Bala, co-founder, primeinvestor.in

Bala goes on to add that existing BAFs use asset allocation alert models that combine signals linked to fundamental and technical analysis, or just fundamental analysis or a bit of technical analysis and momentum indicators.

Different BAFs have different approaches on asset allocation -- ranging from using Nifty P/E as signal to switch between equity and debt, price-to-book ratio, or moving equity allocation to chase market trends, and even maintaining a fixed equity-debt exposure.

According to Bala, this complexity that comes with BAFs makes it less suitable for first-time investors and suggests such investors can use different schemes to bring asset-class diversification in their portfolio.

Moneycontrol’s take

A completely rule-based BAF can get rid of fund manager biases, which can be strong when markets are at extreme valuations.

NJ MF has done intense back-testing and analysis of its BAF, which covers the gyrations of 2008, 2011 and 2020, when stock markets had come under heavy pressure.

But, it would be better to first wait for the fund build a track record in the current market conditions and see how it can differentiate from others in the space. The new fund offer closes on October 22, 2021.